BIS slams cryptocurrencies but recognises uses of blockchain

June 18, 2018

Chris Wheal

The Bank for International Settlements (BIS) said in its annual economic report, published on Sunday, that it could not identify a specific economic problem to which cryptocurrencies could currently provide a solution.

Bank for International Settlements, Basel, Switzerland: BIS

Transactions are slow and costly, prone to congestion and cannot scale with demand, the organisation – often referred to as the central banks’ central bank – said.

While it also criticised “decentralised consensus” behind the technology as “fragile” and a consumer of “vast amounts of energy, BIS said distributed ledger technology could have promise in other applications.

“Policy responses need to prevent abuses while allowing further experimentation,” the report said.

Lacking scalability

Scalability was one of the main inadequacies of cryptocurrencies as an everyday means of payment, BIS said.

“To process the number of digital retail transactions currently handled by selected national retail payment systems, even under optimistic assumptions, the size of the ledger would swell well beyond the storage capacity of a typical smartphone in a matter of days, beyond that of a typical personal computer in a matter of weeks and beyond that of servers in a matter of months,” it added.

Furthermore, it said, processing capacity would be beyond all but that of supercomputers to keep up with the verification of incoming transactions.

Trust

BIS also addressed the issue of trust in cryptocurrencies – much of this related to the issue of forking, where inconsistencies in blockchain protocols force either a backtrack to a previous block or the formation of a brand-new protocol and, often, a brand-new coin.

“Forking is symptomatic of a fundamental shortcoming: the fragility of the decentralised consensus involved in updating the ledger and, with it, of the underlying trust in the cryptocurrency,” BIS said.

Blockchain applauded

BIS did, however, recognise the potential benefits of blockchain technology.

Notable examples, it said, were in low-volume cross-border payment services, or where the benefits of decentralised access exceed the higher operating costs of maintaining multiple copies of a ledger.

“Crucially, however, none of the applications require the use or creation of a cryptocurrency,” it said.

Regulatory challenges

BIS said that cryptocurrencies had created some key regulatory challenges. Foremost among them was anti-money laundering and combating the financing of terrorism (AML/CFT).

“Because cryptocurrencies are anonymous, it is hard to quantify the extent to which they are being used to avoid capital controls or taxes, or to engage in illegal transactions more generally.”

Post written by Chris Wheal

Chris Wheal is editor of OpenLedger's news and features service. An award-wining business journalists himself, he runs a team of freelance journalists from across the UK and north America.